What Is Primarily Responsible for the Potential Distortion Among the ROA

question 62

Multiple Choice

What is primarily responsible for the potential distortion among the ROA of different firms when net income is used in the numerator of ROA?

• A) Firms have different dividend payout ratios.
• B) Some firms use fully depreciated assets.
• C) Financial leverage varies among firms.
• D) Unprofitable firms will not have tax liability.

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Definitions:

Enterprise Fund

A fund used by a government to account for operations financed and operated in a manner similar to private business enterprises, where the intent is that the costs of providing goods or services to the public on a continuing basis be financed or recovered primarily through user charges.

GAAP

Generally Accepted Accounting Principles, a collection of commonly-followed accounting rules and standards for financial reporting.

Statement of Net Position

The Statement of Net Position is a financial report that details the assets, liabilities, and net worth (equity) of an entity at a specific point in time, akin to a balance sheet in the private sector.

Noncurrent Liabilities

Long-term financial obligations a company owes that are not due for repayment within the next 12 months, such as long-term loans and bond issues.